Albanese crashes on a $30bn blunder
With writedowns totalling near $30 billion, Rio Tinto's Alcan deal will go down as one of the worst acquisitions in corporate history. But Sam Walsh's appointment will help the group sidestep the worst instability it could have caused.
Rio made no pretence about the reason for the abrupt departures of two of its most senior and long-serving executives -- it made it clear they were directly linked to another $US14 billion or so of writedowns.
It said it expected to write another $US10 billion to $US11 billion off the value of Alcan and other aluminium assets, but mainly Alcan. That brings to around $30 billion the amount that has now been written off that business, confirming it as one of the worst, if not the worst, acquisitions in corporate history.
It will also write $US3 billion off its coal assets in Mozambique. Ritchie was responsible for the strategy and the execution of the takeover offer for Riversdale Mining in mid-2011, an offer that valued the metallurgical coal group at about $US4 billion. Now 75 per cent of the value has disappeared and Ritchie has accepted responsibility for the outcome of what was Rio's first major acquisition since the Alcan deal.
Rio also said it expected a number of smaller asset writedowns totalling about another $US500 million.
With Rio's finance director, Guy Elliott, having last year foreshadowed his retirement from the company at the end of this year, the departures of Albanese and Ritchie could have been extremely destabilising for Rio. Instead chairman Jan du Plessis has called on someone the market knows and respects, Rio executive director and longtime head of its core iron ore business, Sam Walsh. Walsh would be regarded as the quintessential safe pair of hands and his appointment will buy Rio time to look for his eventual successor among its next generation of executives.
Albanese barely survived the first of the series of Alcan writedowns and the board tensions that led to the departure of former chairman Paul Skinner, with du Plessis -- who became chairman during the worst moment in the group's long history -- giving him the benefit of the doubt. Skinner was essentially an executive chairman and, with Albanese having only just been appointed chief executive when the Alcan bid was made, Skinner was seen as the prime mover in an acquisition that brought Rio to its knees and almost delivered it to BHP Billiton and later China's Chinalco.
Five years after the event, and after continual restructuring and writedowns on the Alcan assets, however, there is little doubt that the business is Albanese's responsibility and the latest writedowns sealed his fate. It wouldn't have helped that Rio had to take such a big hit on Riversdale, which was very clearly his deal, and Ritchie's.
Du Plessis, having given Albanese the benefit of the doubt where most other incoming chairmen of a company in Rio's position in 2007 wouldn't, really had no choice but to accept/encourage Albanese's resignation.
There were some extenuating circumstances. The aluminium industry generally is under extreme pressure, with rising costs and thanks to changes within the Chinese market's weak demand. There is a view that the traditional producers are operating in an industry whose structure has changed to the point where there is no future for them, a view which appears to have been borne out by the staggering scale of the total Alcan writedowns.
In coking coal, prices collapsed from their peaks last year but Rio also said the development of the infrastructure required to support the Mozambique project had proven more challenging than anticipated, with Rio unable to get approval to transport coal by barge along the Zambezi River. It had also revised down estimates of recoverable coal on the Riversdale tenements, leading to a reassessment of the overall scale and ramp-up schedule of a project Rio once saw as opening a new province in coking coal.
Rio can't do anything about coal prices but developing infrastructure in Mozambique was always going to be challenging and, with the revision to reserves, suggests Rio's due diligence wasn't as thorough as it might have been.
Walsh will inherit a very aggressive, $US5 billion cost-reduction program from Albanese and an iron ore price that, while well off its 2011 highs, has rebounded quite sharply in recent months. With the value of Alcan almost out of Rio's books and making only a minimal contribution Rio is essentially an iron ore company, although it is trying to increase its presence in copper.
The exits and the magnitude of the writedowns will come as a shock to the market, despite Rio having previously said it would be looking at asset values for its result, due to be disclosed next month. Du Plessis described them as ''unacceptable''.
Credit to Rio, du Plessis and Albanese for their honesty in not trying to spin any aspect of the announcement. Albanese, who if not for the Alcan legacy would probably be regarded as a highly competent (and unusually modest) chief executive, said he fully recognised that accountability for all aspects of the business rests with the chief executive.
It does -- and du Plessis and his board have ensured that it did.